Tuesday, March 31, 2009

AIG as beard

AIG passed on most of the bailout money it received to twenty large banks, Deutsche Bank and Goldman Sachs being the top two recipients. I argued that AIG was kept alive so it can act as a beard and enable the Obama administration to continue recapitalizing financial firms covertly, because overt recapitalization would require creditors to take a haircut, which seems to be unacceptable to the Govt.

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were 1) one-time in nature due to wholesale unwinds of AIG portfolios, 2) entirely at the expense of AIG, and thus taxpayers, 3) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, 4) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

What the Obama team is proposing is disconcertingly similar to the actions of Japanese Prime Ministers Hashimoti, Obuchi, and Mori in 1995 and 1998: Rather than ask the legislature for straightforward recapitalization money, you have the political leadership preferring to risk overpaying current owners of toxic assets rather than forcing sales. For all of Japan’s supposed intervention in markets, its government still lacked the stomach for taking over banks, let alone closing them.